Li & Fung’s $1.1 Billion Strategic Divestment

The plan will remove three product verticals: furniture, sweaters and beauty.

Global trading and sourcing company Li & Fung revealed a $1.1 billion strategic divestment on Thursday that will see the sale of three of its product verticals: furniture, sweaters and beauty.

Subject to independent shareholders’ approval, the businesses will go to a buyer consortium — a 45 percent stake to private equity firm Hony Capital, 45 percent to Fung Holdings 1937 Limited and 10 percent to Fung Investments Limited FIL. The latter two are owned by the same family from which Li & Fung gets its name.

The transaction is expected to close in the first half of 2018. It proposes a special dividend of $520 million paid out in cash to shareholders and the remaining $580 million will be reinvested back into the company. The disposal will incur a one-time accounting loss of $610 million but management assured it would not impact future cash flow nor financial and operating performance.

Spencer Fung, group ceo of Li & Fung, said, “The strategic divestment of the product verticals allows Li & Fung to focus on its core competencies and further strengthens our capital structure. The $1.1 billion proceeds will allow us to pay a generous dividend to our shareholders and the remaining $580 million of cash will give us more financial flexibility as we continue to execute our Three-Year Plan goal of building an end-to-end digital supply chain. Our first-half results were solid and our customers and vendor partners are responding very positively to our new digital solutions. We are very excited to be creating a future supply chain that does not yet exist in the market.”

Li & Fung will continue to operate in the areas of supply chain solutions, logistics and onshore wholesale business. The verticals to be sold were created in 2015 but the firm said “further growth in these product categories necessitates expansion upstream and downstream, requiring capital investment and management attention.”

Turnover for the three verticals was $1.87 billion for the year ended Sep. 30 resulting in core operating profit of $89 million. The categories have seen a downward trend. In 2016, it registered $92 million in core operating profit and the year before that $103 million.

Li & Fung has been steadily streamlining its operations. The proposed sale follows the spin-off of Global Brands in 2014 into its own publicly listed company and the divestment of its Asia consumer and health-care distribution business in 2016.

John Zhao, chairman and ceo of private equity firm Hony Capital commented on the deal, “We look forward to working with the management teams of the product verticals to sharpen their distinct strategies. With our value-added services, future success lies in going deeper into their respective product categories.”